ICELANDIC KRONA DROPS TO NEW LOW, INCREASING CALLS TO

UNCLAS REYKJAVIK 000203 USDOC FOR LEAH MARKOWITZ TREASURY FOR LAWRENCE NORTON STOCKHOLM FOR FCS SIPDIS E.O. 12958: N/A TAGS: ECON EFIN IC SUBJECT: ICELANDIC KRONA DROPS TO NEW LOW, INCREASING CALLS TO ADOPT EURO REFS: A) REYKJAVIK 85, B) REYKJAVIK 66, C) REYKJAVIK 55 ¶1. (U) As a result of the international financial crisis and lack of liquidity in the credit markets, the Icelandic krona (ISK) has taken a beating, falling almost 50 percent since the start of the year. On September 17 the ISK trade weighted index, which measures the price in ISK of a weighted average of the currencies of Iceland's biggest trade partners, hit a record high. There is consensus among most Icelandic experts that the ISK has hit close to bottom, but none predict when it will start strengthening. ¶2. (U) Iceland is very dependent on imports and the exchange rate has a large influence on prices of consumer goods. The 12-month inflation rate now measures at 14.5 percent. Many Icelanders are also feeling the pinch as their monthly payments on foreign currency loans -- a common instrument for car loans and mortgages -- have risen dramatically. ¶3. (U) Calls for adopting the Euro have increased as the ISK has slipped. Prominent members of the Progressive Party, an opposition party in Parliament, are proposing a referendum in early 2009 on joining the EU. However, Prime Minister Geir Haarde continues to take what he calls a pragmatic approach to the currency issue and he believes the benefits of keeping the ISK outweigh those of adopting the Euro at this time. KLOPFENSTEIN